Is There a Leak in the OECD's Global Minimum Tax Proposals (GLOBE, Pillar Two)?

Abstract

There might be a leak in the OECD’s global minimum tax proposals (GLOBE; Pillar Two). To address the remaining challenges of base erosion and profit shifting (BEPS) by large multinational enterprises the OECD envisages a global minimum level of company taxation and top-up taxation by countries up to that level where other countries do not adhere to the new standard. The objective is to reach political consensus mid this year within the Inclusive Framework, a tax policy discussion platform of the OECD uniting around 140 countries. A blueprint on the system’s technical design is currently being debated. If put in place as now devised the Pillar Two system may be prone to be gamed. Parties having an interest in this would be able to raise the minimum level at their discretion - without actually paying more tax - to accordingly circumvent the application of the top-up taxation mechanisms. The key lies in the strategic use of differences between tax accounting and commercial accounting, particularly those in relation to the qualification of financial instruments as debt or equity. Underneath lies the choice to base the Pillar Two system on transfer pricing and single-entity financials. If left unaddressed a new world of tax planning opportunities would likely emerge. Please read further below on how the planning would work, together with references to some alternative reform options to address the challenges raised in international company taxation.